Remember, stocks are priced to deliver a positive return for investors.
It’s a common misconception among investors that a market high signifies overvalued stocks. But interestingly, historical data suggests that average returns one, three, and five years following a new month-end market high are similar to those after months ending at various levels.
Take, for instance, the S&P 500 Index from 1926 to 2022. Approximately 30% of all monthly closing levels during this period were new highs. Annualised returns following these highs ranged from nearly 14% after one year to over 10% after five years. These returns are quite comparable to average returns over any equivalent period.
It’s important to remember that stocks are priced to deliver a positive return for investors. Therefore, regularly reaching record highs is an anticipated outcome. So, the next time you see the market hitting a new high, don’t be too quick to assume that stocks are overvalued. The numbers tell a different story.
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